Risk associated with offshoring

Offshoring-related risks introduce new complications associated to operations across countries. Feeny et al. (2004) divided the potentially severe risks into three different parts, and these are transformation, relationship skills, and delivery (Kumar, Kwong and Misra, 2009).

Transformation services are determined by risk factors such as the transfer of technology, people at risk during material transfer; whereas relationship skills consist of reputation risk, compliance risk, and country risk. However, increased delivery time can directly result in the strategy, operations, and credit risks to the organization. Figure 2 illustrates a diagram with possible risks associated with offshoring.

17 Figure 3: Risks of Offshoring

Quality Risks

Several studies indicate that captive offshoring and quality risk go hand in hand. Gray et al.

(2011) emphasized that captive offshoring activities result in a quality risk to the company, it may cause due to physical and cultural and distances, legal differences, educational gaps between countries. Moreover, the geographical and cultural distances may hinder the communication and result in the form of risk of information (Gray, Roth and Leiblein, 2011).

Employees need to follow daily reporting measures to safeguard the operation and run at low-quality risk. It is difficult to monitor employee behaviors from afar (Tosi, Katz and Gomez-mejia, 1997).

18 Risk of dependency

Another relevant term that scares the company's managers during outsourcing is the risk of dependence. In a case where the supplier company has the upper hand to the client, there is a high risk of the quality of the production as the client is entirely dependent on the latter (Lonsdale and Cox, 1998). Undoubtedly, the decrease in the product quality is not always due to the supplier's opportunistic conduct, but lack of capabilities can also be one of the reasons.

Strategic risk

Strategic risk is related to those risks that affect the long-term scheduling for the organization.

It is a “risk to earnings or capital arising from adverse business decisions or improper implementation” (Kumar, Kwong and Misra, 2009). Hogan argues that outdated inventory, intellectual property, and currency risk are underestimated and at the same time, the wage savings are overestimated by the manufacturers very often. Strategic risks come into existence when a firm offshores some of its tasks (instead of its core competence) to another service provider which fails to achieve the goals. It is advisable for the firms to communicate its long-term targets and planning to is service proving partner to avoid any strategical risk in future (Kumar, Kwong, and Misra, 2009).

Operational risk

Operational risk is another factor to consider while deciding the offshoring the tasks. These risks are associated with the process of execution, exist due to probable slippages; these are the risks to the quality, cost, or speed. The income of the organization is directly proportional to the speed, quality, and the value of the process execution, and it is one of the sources of competitive advantage to the organization. The above-discussed risks are results of the failures of three factors; these are employees, technology, and processes. Technology risk is related to technology failings linking in the organization with offshore service providers, whereas people risk is associated with a higher average turnover of offshore jobs and a low level of skill amongst the workers.

Larsen et al. (2013) explain that coordination involves complexities like hidden costs, lesser face to face meetings, and most importantly, the limitation in rationality. These points make the coordination a complex phenomenon and a sort of issue in offshoring tasks. These challenges should be kept on the highest priority, as it comprises a high possibility of task misunderstanding and corresponding deliverables. However, there are possibilities to explain

19 the problems through e-mail, telephone, or chats than a face-to-face meeting. Moreover, nowadays, some application allows people throughout the globe to connect over the internet and share their screen with video calling facility in real time (Kumar, Kwong and Misra, 2009).

Trent et al. also argued that in Captive offshoring process, people are scattered throughout the world, which makes a face to face meeting, a challenge. Secondly, duple responsibilities and pressure of delivery time can result in conflicts among the workers sitting in different locations.

They also focused on some essential points which articulate that, people working for a specific task, sitting in different locations of the world can have different cultures, languages, and working environments. This can result in misunderstandings during coordination and can consume more time than planned, which can affect production and delivery (Kumar, Kwong and Misra, 2009).

Process risk

Process risk is a subcategory of operational risk, and it revolves around the assessment and measures of how effective and efficient a process is. In a company, if the quality of the delivery product goes down to a set limit, the management can meet to facility department and request for the improvement in the process for better result of deliveries. However, in the case of offshoring, the same situation cannot be handled in the same way. The management of the company should have faith in the competencies of the offshore facilities. This trust should be considered on the other parties while planning for offshoring.

Structural risk

Aron et al. explained structural risk as to the inherent risk for an offshoring firm, and it occurs when the structure of the offshoring firm fails to match with the structure of the offshored partner (Aron and Singh, 2005). They emphasize that this type of risk is also a result of ignorance of offshoring partner in investing employing people or in (their) training as promised during the negotiations phase. In other words, structural risk can be considered as a part of the operational risk assessment because it is closely connected with it. This risk can be mitigated if the companies have supervision on the provider's (offshored partner's) deliverables. This is now a day very easy and practical for the Companies, to track the providers work in real time with the help of relevant IT tools. Another way to mitigate is by proper gauging the quality of work and deliverables with the help of metrics developed by the company. This means that there should

20 be some checklists and the other tools developed by the company to gauge the Service provider’s quality of work.

Compliance risk

Another risk which falls in the category of operational risk is Compliance risk. It is one of the prominent factors which needs attention while planning of offshoring the business. It directs to the chances of lower income because of the rules and regulations violations (Kumar, Kwong and Misra, 2009). As there are different rules and regulation in every country, so it is advised that an organization should research thoroughly about the laws of the service provider (partner's) country. PESTLE and SWOT are incredibly useful tools which help in the process of developing a strategic plan for offshoring. They can be used separately, however, becomes significantly efficient when analyzed in a combination. It will help the company to observe and follow the laws of the partner country and minimize the risk of laws violation.

Reputation risk

Reputation risk is a risk that affects the image of the company in its homeland. The general view of the public is a bit negative towards offshoring, and this is because they see it as the dip in the employment for numerous white-collar employees. This negativity in public and adverse advertisement may hamper the company's image resulting in lower domestic sales. There is considerable pressure to keep local jobs (‘The Real Cost of Outsourcing : The Good and Bad : the National Magazine of Business Fundamentals C & FM’, 2004).

Credit risk

Credit risk has a significant effect not only in national companies but in international too.

However, it has a more considerable influence on Multinational companies. There are stringent guidelines and laws in some countries that empower the organizations to recover receivables from accounts. The situation in almost every other country around the globe is different and unique. However, there are many countries where the organization is not allowed to claim their dues due to the inexistence of sound policies. This inability to trail the payment creates hindrance to business processes.

21 Country risk

Country risk is the definitive source of uncertainty for an organization performing offshoring. It focuses on political, socio-economic environments, and nation-related matters (Kumar, Kwong and Misra, 2009). If an organization plans to offshore to a politically unstable country, it becomes imperative for the organization's business to find answers to country-oriented risk questions. War creates uncertainty and numerous other factors, which must be considered in an operational context. Besides war, countries experiencing political chaos do not offer a fruitful offshoring environment. The laws governing the offshore facility are affected by political uncertainties, and with this, additional compliance risk uncertainty is eliminated. However, the country risk can be mitigated by understanding compliance and other risks associated with it.